It may be all right on Budget night

The public finances could be on track to end the year in balanceor, at a stretch, in a small surplus, writes Una McCaffrey

A surge in tax revenues and a slowdown in Government spending have effected a turnaround in the public finances ahead of today's Budget.

Exchequer figures for November, released by the Department of Finance yesterday, show that tax revenue was €4 billion higher than in the previous month, or 4.3 per cent ahead of the same point in 2001.

While still short of full-year targeted growth of 8.6 per cent, this remains well ahead of the 2.3 per cent increase recorded last month.

The rise, attributable largely to timing factors within the income and corporation tax systems, was accompanied by a substantial slowing in public spending, as the Minister for Finance, Mr McCreevy, attempts to meet a target of 14.3 per cent growth in day-to-day spending for the year.

In the first 11 months of the year, day-to-day spending grew by 17.7 per cent, well down on the 20 per cent increase recorded in October. In overall spending, the Minister has already met his target of 11.7 per cent growth.

The returns show that the public finances were in surplus by €1 billion at the end of November, compared to a deficit of €440 million one month earlier.

Economists suggested that the public finances could now be on track to end the year in balance or, at a stretch, in a small surplus. Some had previously been forecasting an Exchequer deficit of more than €1 billion.

For much of this year, Mr McCreevy predicted that the Exchequer would achieve a surplus of €170 million in 2002 but this was revoked last weekend when the Minister forecast an Exchequer deficit of €139 million.

"I wouldn't be surprised if there was a broad balance. It begs the question what all the fuss was about," said Dr Dan McLaughlin, chief economist with Bank of Ireland, after reviewing the numbers.

Mr Colin Hunt, research director with Goodbody Stockbrokers, agreed that the returns offered positive indications on the state of the public purse.

"This is a set of numbers which does not portray an economy falling apart at the seams," said Mr Hunt.

The main thrust behind last month's improvement came from income and corporation tax returns, both of which benefited from technical timing factors.

Income tax returns are now running 2.9 per cent behind last year's levels, a significant gain on last month's 9.3 per cent annual decline.

Corporation tax receipts have staged a more impressive improvement, turning last month's annual growth of 7.2 per cent into a year-on-year increase of almost 20 per cent.

VAT returns have also provided a positive stimulus, growing by 12.9 per cent in the 11 months to the end of November, a slight improvement on October.

Mr Hunt pointed out that even when the increase in the VAT rate from 20 to 21 per cent was excluded from this growth, the underlying growth in VAT returns in November was 7.6 per cent, the highest seen so far this year and illustrative of positive momentum in consumer spending.

Mr Oliver Mangan of AIB's economic research unit believes that, even with improvements, tax revenue will still come in some €1 billion below the Minister's initial predictions.

He notes, however, that this is likely to be largely offset by sources of non-tax revenue and a decline in non-voted current spending.

A further €285 million is due to flow into the Exchequer next month as the Central Bank pays over the last of the euro changeover cash targeted in last year's Budget.

Mr Austin Hughes, chief economist with IIB Bank, agreed that the public finances had been treated to some extra breathing space in the November numbers but cautioned against overreaction. "We've had months before where it has bounced around a bit," said Mr Hughes, noting that Department of Finance forecasts for next year did not foresee a sustained improvement in revenues.

"I wouldn't get carried away," he said. "It's not a structural improvement.

For complete coverage of Budget 2003, visit Ireland.com's Budget site at: www.ireland.com/focus/budget03/